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I know the trend on financial blogs is to tell you to pay off your debts… but what if this advice is wrong?

A rich person is an individual with no debts. I’ve often heard that quick line explaining that paying down your debts is the universal financial advice. Since the beginning of 2012, I’ve embarked on a quest against my debts. At the end of the year, I quit on paying debts and decided to turn back to what I do best: make money.

This doesn’t mean I’m not paying off my debts. In fact, my latest net worth statement shows that I’m now attacking my consumer debts with success. I’ve also mentioned on this blog that we are concentrating on paying off our corporate debts at a fast pace recently. Over the past 12 months, we have paid down about 30K of our corporate debts and we should pay another 20K this year to finish paying off our debts towards the end of 2014.

Quick accounting tip: you are better off paying your corporate debts over a few years since you need to use after tax money to pay it. Therefore, if you pay everything in 1 year, you will have a big fat check to write to the tax guy!

My partner was quite happy to see my perception of debts changing over the years. After all, I was the one who mortgaged his house to buy our first site 4 years ago…

Why Leverage is The Best Way To Create Wealth

While most people like using a conservative approach regarding debt, I usually think that using other’s people money is the best way to make money. I’ve been thinking this way since I was a kid. I guess it’s in my genes. My life has been covered by leverage stories:

Back in high school, I was 12 when I first borrowed money (it was school money) from my friends to play dice. While it was a very bad idea to borrow money to gamble, I won a lot more money than I lost and was able to quickly reimburse my friend and run with my own money (and keep winning).

Back in College, I was thinking of applying for a student loan to invest in the stock market. Unfortunately (or fortunately), I was too lazy to fill in the paperwork in order to get the loan. Instead, I borrowed $5,000 on my credit card to buy a new car and fund enough cash to move into an apartment. Overall, it was an awesome move since I got a super nice deal in a great area of Montreal for cheap. My car was new and therefore I had never to go to a garage. Within 12 months, I cleared my credit card debt with my first day job.

Right after paying off my credit cards, I bought some land with a personal loan. I wanted to build my assets as fast as I could. Since I didn’t have many payments going on, I thought of borrowing 25K at a bank to buy a piece of land. I sold the land a year later with a profit of $4,000. That’s pretty nice considering I didn’t use my money!

Borrow to invest in the stock market. At the same moment, I wanted to start investing in the stock market. I was following several stocks daily and thought I could make a few dollars out of my new hobby. I borrowed 20K in 2003 and turned it into a profit of 50K in three years. This was the cash down payment for my house.

Borrow to buy the house of my dreams. I borrowed from my parents the amount of 25K a few years ago because I absolutely wanted to put 20% cash down on the house of my dreams. I knew I had to pay back the 25K (plus interest) after 5 years. But I also knew that my career was booming at the time and my income was set to be a lot larger 5 years later. I struggled a bit to pay them back on time, though I did it. In the meantime, I lived in an awesome house where I made a nice profit to buy my third house. I actually used a part of my profit to pay off my parents. This was definitely a great move. From a loan of 25K, I made a profit of $75,000 in four years.

Remortgage my house to buy a website. In 2009, I decided to borrow almost $30,000 using my house as collateral to inject into my online company. This transaction opened the door to many other deals and was definitely one of the pillar moments for our business. Since this purchase, we have been making over $100,000 in annual gross income. I took about 23 minutes to decide to buy the site or not and to remortgage my house. In fact, 3 minutes was for thinking about it and 20 minutes was to explain to my wife why she had to sign all the paperwork ;-).

SO WHY AM I DELEVERAGING TODAY???

After all these great stories about leveraging, I can say that borrowing money is definitely a good idea. I would not be worth 250K at the age of 31 while affording to have a stay-at-home wife + three kids without my leveraging abilities.

However, it’s been over a year that I’m focusing on debt repayment. My goal in 2013 is to drop under $300,000 of debts and would like to clear all my consumer debts other than my mortgage by the end of 2015. Our online company went up to nearly $100,000 in corporate debts last year and we are now down under $70,000 and counting.

Both my personal and corporate finances have been growing year after year due to several leverage maneuvers. Nonetheless, I’m taking the decision to clear my debts in the upcoming years. By the end of 2015, I should only have a mortgage over my head and my company will be free of debts. Can you see me coming with this?

That’s right: I’m preparing for financial freedom. In two and a half years, I’ll be 34. By the age of 35, I wish to be financially free. This doesn’t mean that I won’t have any debts but if I can clear everything and have just a mortgage to take care of; I can basically live from any kind of income and still be able to make it.

While leveraging has been the only solution to generate income over the past 10 years in my life, it’s time to clean my balance sheet in order to move forward a lot faster. You know I’ll start borrowing again at the age of 35 to grow my income & assets to a whole new level. I’m just preparing my balance sheet for another big jump in two years…

What about you? Have you ever borrowed money to accelerate your asset building?

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Yesterday, I started to talk about my experience with leveraging. Today, I have a third story about borrowing and how we deal with leverage in our business right now. If you have any questions, please send them my way!

The Third Loan Really Consolidated Our Positions

Maybe it was a mistake, maybe it was because we were super optimistic but we didn’t pay back our second loan right away. During that year, we were raking in the cash and using a part of it to fund other projects. At the same time, we were paying our line of credit to give us some room but we didn’t touch the private loan. We decided to pay only the interest. After a while, we wanted to buy a new site. We had some liquidity in our account and the goal was to buy it cash (and then focus on paying off our second loan). But the price went wacky and yet we still decided to buy it. This was before The Google PR Slap. We weren’t affected by the slap directly but the business has changed since then.

It’s Always Scary Isn’t?

Although the third loan wasn’t different from the others; we were scared to borrow again, especially enough money to buy a nice car! Well… as long as we don’t borrow enough money to buy a house, it shouldn’t hurt, right? Hahaha!

But seriously, before ploughing more money into the company, we setup a payment plan. We didn’t want to keep borrowing and bury ourselves with debts.

However, buying these two sites was a very, very good idea. It helped us diversify our sources of income and without those two loans; we would have not been able to weather this storm as well as we did. In fact, our business would have dropped under the 6 figure mark for 2012.

Paying Back Our Leverage Loans

At the beginning of the year, especially due to what happened in the web industry, we decided to pay back our business loans. We implemented an aggressive debt payback policy where we drop our business loans by $3,000 per month. So far, it has been somewhat challenging to reach it but it is quite interesting to see the debt going down so fast. The third loan will be paid in full early in 2013 and in two years, the business will be 100% debt free and we will be able to benefit from our hard work. The goal is to put back the company back on track to give it the flexibility for the future.

The Main Problem With Leveraging – When It Doesn’t Go As You Thought It Would

I like the basic principle of leveraging: you borrow at X% interest rate when you can make X+Y investment return. As long as your “Y” is positive, then you are making money faster than expected. The problem is when things go the other way around; when “Y” is negative, you are losing on money that is not yours.

The moves we made over that past 18 months was done in a known environment. We knew that we could make more money and that our “Y” was going to be positive. It turned out well as our investment projects have always been positive and we are still making a lot of money on all of our sites. However, the “Y” we calculated in the first place didn’t happen this year. We were expecting to continue making money with private advertisers at the same time as growing our other sources of income.

When you leverage and revenues are not coming as expected, you automatically lose flexibility. If things turn sours, you can even end up in a dire financial situation very fast. Imagine if one of the sites that we bought would have busted the next week and dropped earnings down to 0. This would have created a situation where you have a debt over your head but no engine to generate cashflow. In such a situation, you better have some money put aside to reinject and keep your project in the black.

Leveraging is Not for Everybody and It’s not a Money Matter

There is also the psychological aspect of money that you should consider before leveraging. Some people can’t stand debts or can’t stand paying interest. If you borrow $25,000 today to invest in a project, it is very possible that you won’t see the fruit of this for a while. This is why you must be able to live with a debt of $25,000 while you only have an asset on paper that may be worth at least the same amount.

But this asset on paper is not cash in your bank account. You need to either make it produce cash flow to pay off the debt or consider selling it. So if the asset is not producing up to your expectation, it’s normal that you feel stressed and disappointed. These feelings are definitely motivation killers and won’t help your situation at all. This is why I would not advise anyone to start with an important leverage loan as you don’t know how you will react with debts.

Will I Leverage Again?

My partner would probably take a serious look in my direction if we were asked this question at the same time ;-). Honestly, I would not borrow right now to grow my business. The environment has changed a lot and I don’t feel that I have a complete grasp of this “new playground”. I would like to make sure I understand the new parameters and that I master the system completely. After that adaptation period, I’m sure I’ll be up to borrow money again if it means that I could grow my company to another level.

The last step of this venture is to produce enough income so we can both retire. So you can guess that our next leveraged project may be worth the price of a house hahaha!

In the meantime, I’ll focus on paying off corporate debts and gain back our flexibility. The fun part with a business is to do whatever you want whenever you want. If it’s not that, it’s simply a job!

Have you ever considered borrowing to invest in one of your projects? Do you think it’s reasonable?

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Last week, MD wrote about how you don’t need money to start a business. He explained what you can do to start a business without a single buck in your pocket. I must agree with him that with the internet, pretty much anybody can throw themselves into the business mosh pit and start thrashing. I use the word thrashing because running a business is not always a fun game where you sing and dance with butterflies. Sometimes you also have to stand-up and get ready to battle your way out. But it doesn’t mean that it’s not fun

I Believe in Leveraging

I am a firm believer in leveraging. I know it’s not trendy and also know that many folks will tell me that there is nothing better than paying cash for everything and not carry debts. In a perfect world, I would like to be debt free. But that’s not my ultimate goal because I know how much I can do with more resources. Let me share with you how we borrowed money three times to accelerate our business.

The First Loan is Scary

I still remember exactly how we took the decision to borrow money to make our company grow. My partner and I thought of buying a blog in order to grow our network and expand significantly. We had bought Intelligent Speculator a few months before our big transaction and discovered that we could make a lot more money with an existing blog than by starting a new one. We finally found “an important player” to buy and we were all excited about it. We started the discussion with the owner by email and quickly reached 5 figures in our negotiations. The price was worth it but we didn’t have more than $4,000-$5,000 in our company bank account. I started to realize at that time that we would need to find funding if we wanted to make that purchase.

When we got close to sealing the deal, I was driving with my wife looking at properties. We used to drive through new neighborhoods to look at properties. Sometimes to get ideas for our own house and other times to see what was on the market. Between two stops, I called my partner to make up our minds. My wife was sitting right beside me and she wasn’t too aware of the whole deal. She just knew that we were going to buy a big site. Then I said to my partner;

“All right, let’s do it”

“But we don’t have the money” he replied

“I just have to borrow it from my house, I have enough equity”

I stopped driving at that time and my wife stared at me. Yeah… I should have told her about that move… lol! But it wasn’t the first time I had used leverage in my life and she knew that I was good with money. This is why the discussion with her was brief. But still, I was scared big time. For the first time of my life, I borrowed more than enough to buy a brand new car and was putting this into my company to buy a domain… wow, I must have been crazy!

This is How We Started Our Business

This purchase was the most important move in our business ever. It opened the doors to new bloggers, new contacts and new ways of making money. We had learned about how SEO was done on other sites and we could improve it with our own techniques. After only 6 months, we doubled the site’s income and we were rapidly paying my mortgage back.

Then, we got an offer only 9 months after owning the site. This was a no brainer at that time; it gave us enough liquidity to pay off my leverage loan in full, treat our self with some company expenses and we bought 2 more sites a few months afterwards. At that time, we could really tell that we had a solid business with a core strategy and a plan for expansion.

The Second Loan Was Even Scarier

I thought that borrowing enough money to buy a car and investing it in my company was scary. I didn’t know anything about leveraging! Our second loan was even more scary. For a while, we were running debt free in our company and we were able to grow on a consistent basis. But we wanted to make another jump. We wanted to generate 6 figure gross revenues from the company on a stable basis. The amount to borrow for this site was scary by itself. It was almost double the previous loan! At that time, we didn’t have equity on our house to borrow that money and this is why we reached out for private money.

But the scary part was not there; the scary part is that we were about to hire a VA to work for us and help us to manage the whole business. I remember that I was afraid to hire someone. It was scary because for the first time in our short lives as business owners, we became responsible for someone. We had to generate money because that individual was counting on us to get his pay check. Wow… I never thought that having such responsibility would be a burden at the same time. I always thought that having employees was “cool” because we were finally running something close to a “real business”.

Another Learning Lesson

I can’t say that this project was a failure but I can certainly call that it didn’t go as we thought it would. The metrics and ratios we used to see how much we could make with that site were completely off. Since it was a big site we had no other choices but to pay a premium. We didn’t mind since we had a plan. But the plan didn’t work out as we thought it would! We were convinced that we could double the monthly income in a heartbeat. After buying it, we lost an important advertiser and had difficulties finding another one to replace it.

We really had to work hard to improve this site and make it profitable. At that time, the money made wasn’t as easy as we thought it would be. To date, it’s been a while that this site has been in our network and I can tell that we are still making good money with it but it wasn’t that easy. Fortunately, we realized that there was, once again, new ways to make money. But more importantly, we realized that we couldn’t export our business model on every single site we buy and ride it to the top.

Stay Tuned For Tomorrow!

When I started writing this post, I wasn’t sure it could be long enough to make 1 post. Now I realized that I still have a lot of things to say about leverage! Tomorrow, I’ll be talking about our third leverage story along with how we deal with debt in our business. Stay tuned!

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Some people will think that I’m crazy but I did it again! I took out another loan. But don’t worry, I’m not taking a real loan and it’s not to finance my lifestyle. I’m taking a $10,000 RRSP loan (loan used to contribute to my retirement plan) to benefit from the dip in the markets. I was a bit slow to get it so I only started investing on August 12th. However, there was some damage done on the market and since I was going to invest $10K from my bonus in January for my RRSP contribution, I’m just doing it 5 months in advance as I think it’s good timing!

Since maximizing my RRSP is one of my financial priorities, the first thing I always do with my year-end bonus is to maximize my retirement account. Since I’m allowed, I know that my first 10K of bonus will go towards my investment account. The only difference is that, right now, I have a great chance of making a better return. I’ll be detailing my trading moves on The Dividend Guy Blog but I wanted to discuss the leverage strategy here. Why? Because leveraging is one of the most powerful tools used to reach financial independence.

I recently discussed how Uncle Sam is helping us make money. This is why I have decided to put my money where my mouth is and to benefit from the situation. The stock market has gone down on government debt concerns. This is why successful companies with strong balance sheets are declining in price for no sound reason. This looks like the perfect time to jump into some dividend investing!

How to know when to borrow?

I’m a big fan of leveraging, you know that. However, there is always a good time to borrow. And this is quite easy to know when you should make the move:

a) Interest rates must be low with a reasonable perspective that it will stay low

b) There must be an opportunity in a market that you understand

c) You must have a repayment plan before borrowing

If you can combine these 3 factors, you have a winning situation to borrow. As the interest rates in both Canada and United States will likely remain at a low level for a year or two, you already have the first factor as a given.

Then, you must find opportunities in something that you understand. If you have no clue how the stock market works, it might not be a good idea to jump in blindfolded… it may hurt! However, you can also check out the real estate side. The fact that interest rates are low makes investing in real estate easier. The key here is to know what you are talking about so you can really determine if there is an opportunity or not!

Finally, you must know how you will reimburse your leverage. Many people borrow money expecting their investments to repay the loan. This is always a poor strategy. Why? Because even if you know what you are talking about, there is always a chance that you could be wrong. For example, right now, I think we are in the middle of a small dip in the market. However, I could be wrong and the market could continue to go down for several months. If I was expecting to make a quick buck from the market and payback my loan in 6 months, I would be in trouble. Yet in my actual situation, I know that I will have a bonus of around $30-40K. Therefore, borrowing 10K upfront is not such a big deal.

Don’t look back

Once you have planned your leveraging strategy, don’t look at your debt and investments all the time. Stop doing the match up of what you owe with what you have made. Most opportunities come with fluctuation and volatility. You don’t want to second guess your moves. Just wait a few months before you take any actions. In fact, once your leverage strategy is in place, you should be able to hold onto it for several years. If you invest aiming to make a quick buck, think again; leverage is not for you!

Are you going to borrow to invest in the market?

What do you think of this strategy? Are you looking to leverage the market?

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Unless you have been living under a rock since 2008, you already know that: The USA has a debt problem. Okay, so far, nothing very shocking here as half of the planet has a debt problem! However, the USA debt addiction reached critical mass last week with the need to increase their debt limit. On top of this, Standard & Poors dropped their credit rating from the historic and prestigious AAA to AA+ (which is one grade lower). What the hell does the USA credit rating change have to do with anything in your life? I guess you are asking yourselves the question even more if you are Canadian. Well, regardless if you are American or Canadian, the USA is helping you become richer by fooling around with its credit rating. Here’s how:

The Case of Interest Rates

Since the end of 2008, borrowing rates have been at their lowest since I was born (1981 for the most curious of you!). The interest rate has been cut down to the minimum in order to let both consumers and companies breathe and avoid a bigger financial collapse. Having such low interest rates is good for most consumers as;

a) It lowers their mortgage payments (and enables the smartest, who kept their original payment amount, to pay more capital at the same time)

As European countries are struggling with their debts and the Americans can’t restart their huge capitalist engine, interest rates should stay at low levels for another year. This means that it gives you the opportunity to use these low interest rates to your advantage. If you look at my net worth statement, I have personally decided to not pay my debts and focus my cash flow on asset creation. I didn’t borrow more money to leverage per se, but I am voluntarily ignoring my debts to focus on adding more assets. Once the interest rates rise again, I’ll probably change my strategy as I will be making more money (from my assets) and be in a better position to clear my debts.

Opportunity on the stock market

I don’t know if you have followed the market for the past 2 months but it is going down week after week. The main concern (for the past 18 months) is again the debt level of many countries, especially the US of A. On the other hand, there are plenty of great companies that have published strong financial results over the same period.

This is what tells me that investing right now is a great idea. If you have missed the gigantic 2009 stock market rebound, you can certainly make a few bucks from the next rebound. When will it happen? I don’t know. All I know is that when you can buy successful companies with strong balance sheets paying high yield dividends, it’s like Christmas during summer time!

Opportunity with real estate

Then again, if both interest rates are low and the stock market is down, chances are that you can also find great deals in real estate. I wouldn’t look North of the Border for this one as the Canadian housing market is not in a bubble according to me. However, many people can’t afford to pay for their homes in the States (since 2007!). So buying a piece of land or a vacation property might be the good timing at the moment.

Opportunity to create a business

If you can create a business and survive the present economic times, your business will skyrocket once the economy gets back on its feet! Tough times are always the best time to start a new business since you will be up and running when the lights come back on.

You can benefit from low interest rates and the fact that people want to get rid of their house/land/condo. Why don’t you become their savior? Many people got rich during the last real estate crisis.

Seizing the opportunity is like surfing:

Are you too afraid to jump at any of these opportunities? You would rather wait until things calm down a little and “wait for the better timing”. Remember this: seizing the opportunity is like grabbing the perfect wave when surfing: if you are sitting on the beach waiting for the perfect wave, chances are that you will see it happen in front of you but you will be 200 feet away and won’t be able to jump on it. On the other hand, the surfer dude who is already in the water, battling with small waves and being crushed once in a while will have a much better shot for the perfect wave. image credit

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